A “good deal” is a function of both the terms under which an exchange of contracts takes place and the price paid or received on completion of a sale and purchase agreement. A high price is no good to a seller if a large portion of the proceeds of sale needs subsequently to be handed back to a buyer in order to compensate for breaches of warranty. Similarly, a low price is not particularly advantageous to a buyer if the assets acquired prove to be subject to unexpected defects for which no redress is enforceable against the seller.
The drafting of a Sale & Purchase Agreement seeks to ensure that a buyer receives what was anticipated and that a seller can walk away with confidence that its continuing liabilities are both known and quantifiable. As a compromise between these two extremes, the drafting of warranties and indemnities identifies the risks in a deal and decides upon whom they should fall.
Structure of a Sale & Purchase Agreement
- Letters of Intent & Heads of Agreement – agreements leading up to the SPA
- Definitions – remove complexity from the body of the document
- Exchange & Completion – two separate exercises, preferably contemporaneous
- Pre-Conditions – allow the buyer to slide out of the deal
- Covenants – negative or positive promises
- Boilerplate Clauses – non contentious regulation of the contract
- Schedules – details at the back of the document
- Comfort Letters & Side Letters – useful to oil the wheels of the deal
Representations, Warranties & Indemnities
- Drafting Objectives – what do the parties wish to achieve?
- Purpose of Warranties – retrospective alteration of the price & extracting disclosure
- Transfer & Retransfer of Risk – a game of tennis where the risk is the ball
- Long & Short Form Warranties – What is the difference, if any?
- Warranties Given by the Seller – to ensure that the buyer gets what is promised
- Warranties Given by the Buyer – to underpin the value of consideration shares
- Indemnities Given by the Seller – to counteract the effect of a buyer’s knowledge
- Management of the Meeting – importance of forward planning & a clear agenda
- Solicitors’ Undertakings – smoothing the Way
- Timing Problems – remove any sand from the machine before starting the meeting
- Release of Charges – deed of release & letter of non-crystallisation
- Money Transfers & Funding the Buyer – are the formalities in place?
- Consideration to be Paid in Shares – do they exist and are they to be listed?
- Completion in Escrow – only if completion almost certain with negligible time delay
Who Should Give Warranties?
Dual Purpose of Warranties – to extract information & impose liability
- Executive Shareholders – should passive shareholders give warranties?
- Management Buyouts – should selling shareholders give warranties?
- Receivers & Administrators – vague assurances or something better?
- Listed Companies – the ultimate caveat emptor deal
What is Disclosure?
- Reasons for Disclosure – limitation of seller’s liability
- Warrant the Disclosure Letter and/or Due Diligence Reports? – the buyer will ask
- Defective Disclosure by the Seller’s Management – sue them for negligence?
- General Disclosures – negotiation surrounding example clauses
- Fair Disclosure – vague & ambiguous disclosures will be ineffective
- Deliberate Non-Disclosure – tell the lawyers?
Effect of the Warranties
- Breach of Warranty – if the nature of assets or liabilities doesn’t match expectations
- Misrepresentation – innocent, non-contractual, negligent or fraudulent?
- Rescission – when can a buyer tear up the contract?
- Damages – different quantum under contract and tort
- Purchaser Extends Vendor’s Liability – casting a wider net over the seller
- Widening the Definition – extending the meaning of a warranty
- Management Accounts – will the seller warrant them?
- Security for Warranties and Joint & Several Liability – aim for the best target
- Full Title Guarantee – tightening the provisions of the Law of Property Act
- Seller Limits Liability – reduce the effect of inducements given to the buyer
- Narrowing the Exposure – the effect of an ‘Entire Agreement’ clause
- Unexpected Benefits – achieve a level playing field
- References to Statutes – avoid the impact of retrospective legislation
- Limitation Periods – seller’s liability does not continue for ever
- Floors & Ceilings – thresholds, baskets & caps
- Debt Collection & Pursuit of Debtors – make the buyer behave responsibly
- Conduct of Claims – different attitude to commercial claims & tax claims
- Insurance Against Warranty Claims – worthwhile but usually considered too late
- Date of Application – when do warranties bite?
- Interregnum Provisions – what happens between exchange and completion?
- Comparison to Audited Accounts – contentious rather than consensual
- Mechanisms – net assets or cash free/debt free normal to actual working capital
- Limiting Areas of Potential Dispute – cash, debt, stock, WIP, fixed assets, debtors
- Locked Box Transactions as an Alternative – when and how is the box locked?
- Which to Choose and why? – differences to be considered
Barrister and Stockbroker
Roger Baden-Powell qualified as a barrister and joined Joseph Sebag & Co., London stockbrokers, as a property and insurance analyst. In 1978, he became a partner of the firm and was appointed head of equity research and a Member of the London Stock Exchange. Whilst with the firm, he was seconded for two years as the London Stock Exchange Representative to the Executive of the City Panel on Take-overs and Mergers.
Corporate Adviser and Investment Manager
From 1981-1987, he was a partner of Baden-Powell, Chilcott & Co., a City of London based corporate finance and investment management firm. Corporate finance activities included advice on acquisitions and mergers and general financial, commercial and legal advice. The firm also owned minority interests in an insurance broking company and an advertising agency.
From 1988-95, he was with Bank Mees & Hope NV, a Dutch merchant bank (a subsidiary of ABN-Amro) and, in 1991, was appointed CEO of the bank’s UK corporate finance and investment management subsidiaries and executive chairman of the bank’s UK private client stockbrokers, Shaw & Co..
Corporate Adviser and Trainer
Since 1996, he has been a director of Baden-Powell Associates Limited (BPAL), corporate advisers. In 2002, he distilled his experience of corporate deals into 16 one-day courses which he has now presented over 700 times in and around Europe … sometimes as far away as Moscow, Riyadh and Johannesburg. Approximately 7,500 accountants, lawyers, corporate advisers, bankers and business owners have attended his one-day courses over 98% of whom have said, in their written testimonials, that his practical and commercial emphasis on examples of real deals was a very effective learning format. In 2017, he videoed his most popular courses which are now available as the "Corporate Advisers’ MasterClass"(130 videos with 33 hours of training).